Size — and flexibility — do matter

Like many in Chicagoland, I was disappointed when Macy’s re-branded all of the Marshall Fields stores. In some ways, it was meaningless. Marshall Fields no longer had any special Chicago feel to it and was just a generic department store. However, it was hard to be excited about Macy’s explicitly blending the chain into its bland fold. With that in mind, I found a recent story about how Macy’s is dealing with apparel suppliers quite interesting (Macy’s Buying Clout Drives Supplier Consolidation, Mar 23, Wall Street Journal).

Macy’s is now clearly one of the 800 pound gorillas in American retailing and its suppliers have been trying to reposition themselves to better serve the firm. Case in point, Phillips-Van Heusen Corp. (PVH) which recently bought Tommy Hilfiger Corp. Hilfinger has an exclusive distribution deal with Macy’s and PVH went out their way to tell Macy’s that wouldn’t change. Indeed, according to the article, dealing with Macy’s was one of the primary motivations for the deal:

The deal underscores how Macy’s is refashioning the U.S. apparel industry. By leveraging its size to obtain exclusive deals with vendors from Hilfiger to Martha Stewart Living Omnimedia, and consolidating its regional buying offices, Macy’s has been able to distinguish its offerings from its competitors. The strategy favors vendors with the scale to supply the chain and the inventory-management technology to keep up with its whims. That has forced apparel vendors to consolidate.

“Macy’s may not be a monarch, but they are an oligarch,” said Michael O’Hara, founder of Consensus Advisors, a boutique investment bank that focuses on retail. “If you are doing business with them, you better be big and nimble.”

The Hilfiger acquisition will catapult PVH from its spot as the seventh-biggest U.S. apparel maker to third-biggest behind VF Corp. and Polo Ralph Lauren Corp., with a projected $4.8 billion in fiscal 2010 revenues. The combined company will be the largest vendor in Macy’s menswear category and is rapidly expanding its women’s wear business.

So what’s in it for Macy’s? Should they be happy their big vendors getting bigger. The answer isn’t immediately clear. Presumably a really big vendor is in a better negotiating position and would be harder to replace if they pulled their wares on short notice. On the other hand, bigger might also mean more capable:

For retailers such as Macy’s, there are significant advantages to dealing with larger players. Bigger vendors tend to have more sophisticated distribution and inventory-management systems, which have become increasingly important to Macy’s merchandise localization, which varies store assortments according to local tastes.

Macy’s Mr. Lundgren says that being big, in and of itself, “is not the answer.” The key, he insists, is being big and responsive to Macy’s needs. “If they are big and not performing, then they will become smaller,” he said. PVH recently bumped two rival dress shirt brands off Macy’s floor by spending less than $2 million to buy out the inventory. In exchange, PVH will get increased floor space, which it will occupy starting in the second quarter of this year.

So I see two interesting things here. First, at the tactical level, it is interesting that PVH can buy its way to more floor space by take ownership of a competitor’s items. I wonder where these items go. Presumably other brands are sensitive to having their shirts end up on the shelves of some discounter. PVH can buy out the inventory but they get to dispose of it as they see fit? If so, it makes you wonder how fairly Macy’s deals with suppliers.

The second item is more strategic. For all my bad mouthing Macy’s blandness, they have a strategy premised on tailoring stores to local tastes. At first glance, that would seem to open up possibilities for smaller firms. A smaller brand could just serve Macy’s in the Midwest but that is not how this is playing out. Instead, Macy’s wants firms with broad offerings so that they can customize stores across regions while dealing with a limited number of firms. That clearly benefits the PVH’s of the world. One wonders, however, if it is in their long run interest. Yes, Macy’s delivers a lot of volume but at what point do you become effectively a Macy’s private label with your fate tied to whatever decisions the chain makes?

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